Explore and Discover the Winners When Gas Prices Fall

West Texas Intermediate (WTI) oil for December delivery is currently priced
at $75 per barrel, Brent for January delivery at $78 per barrel. Many investors,
publications and news sources focus only on the drawbacks to falling oil and
gas prices--don't get me wrong, there are many--but today we're going to give
the spotlight to the biggest winners and beneficiaries.

Starting with your pocketbook.

Oil has slipped 30 percent since July, but the only place in the world where
retail gas has fallen as much is Iran. In most countries, gas is down between
10 and 15 percent. Here in the U.S., ground zero of the recent energy boom,
the national average has fallen close to 20 percent. As I said
last week, American consumers have been treated to an unexpected tax break
because of this slump, just in time for the holiday shopping season.

Three of the main contributors to oil's decline are the strong U.S. dollar,
which has put pressure not only on oil but other commodities as well; geopolitics,
specifically tensions with Russia and the Saudis' currency war; and the acceleration
of American oil production. The hydraulic fracturing boom has flooded the market
with shale oil, which in turn has driven prices down. As you can see below,
there's a wider spread between 2008 and 2014 oil production levels in the U.S.
than in any other oil-producing country shown here.

Which Countries Benefit?

Last month I briefly discussed how low crude prices benefit
Asian markets the most because they tend to be net importers of oil and
petroleum. On top of that, a large portion of the population in these countries
spends a significant amount of their weekly income on gas--in the case of
India, as much as 30 percent. The biggest winners, then, are Asian countries
such as India, Philippines, Thailand and Indonesia.

China, the world's largest net importer of oil, second only to the entire
continent of Europe, also benefits. For every dollar that the price of oil
drops, its economy saves about $2 billion annually. Even though it just signed
a multibillion-dollar, multiyear gas supply deal with Russia, China plans on
tapping into its own shale gas resources, estimated to be the largest in the
world.

One notable exception to the Asian market is Singapore. Although the city-state
is a net importer of crude, bringing in around 1.3 million barrels a day, it
depends heavily on oil exports to grow its economy. According to Bloomberg,
in fact, Singapore
ranks second in the world for a reliance on crude, based on a change in
oil exports as a percentage of GDP from 1993 to 2018. Only Libya's economy
is more dependent.

Because the United States continues to be a net importer of crude and petroleum--it
imports around 6.5 million barrels a day, according to CLSA--it has benefited
as well, but its dependence on foreign oil is falling fast.

In the chart below you can see how breakeven prices increase as both global
oil demand grows and the geological formation requires more sophisticated--and
expensive--extraction methods.

Which Industries and Companies Have Benefited?

To answer this question, Strategic International Securities Research (SISR)
ran a correlation coefficient between the retail price of gas and 72 global
industry classification standard (GICS) sectors, focusing on the years 2000
through 2014. Below are the top three sectors that ended up benefiting the
most from falling gas prices. They all have a negative correlation coefficient,
meaning that their performance has historically gone in the opposite direction
as the price of gas, similar to a seesaw.

What this data shows is that the U.S. manufacturing industry has regained
the cost benefit advantage to Chinese manufacturers. It's becoming more and
more attractive to build and create here in the U.S. because the cost of energy
is relatively low.

Leading the list is automakers, suggesting that when gas prices have dropped,
consumers have felt more confident purchasing new cars and trucks. Today consumers
are even returning to vehicles that are known to guzzle rather than sip gas,
such as SUVs, pickup trucks and crossovers. Ford's F-Series continues to blow
away its competition. Since mid-October, General Motors has delivered 7 percent,
Ford 11 percent and Tesla, which we own in our All
American Equity Fund (GBTFX) and Holmes
Macro Trends Fund (MEGAX), 12 percent.

It makes sense that airlines would perform better, since fuel is typically
their largest single expenditure. In 2012, when the average price of a barrel
of oil was $110, fuel accounted for 30 percent of airlines' annual operating
costs. Low fuel costs are cited as the main reason why Virgin America, which
went public last week, reported third-quarter profits of $41.6 million, an
increase of 24 percent year-over-year. The NYSE Arca Airline Index has flown
up 110 percent since the beginning of 2013, hitting 13-year highs, and Morgan
Stanley recently took a bullish position toward airline stocks, showing that
company balance sheets are "structurally sound enough to make 'events' in the
next five years unlikely" and that the industry as a whole is now growth-oriented.

SISR highlights a few industries that surprisingly have had a positive correlation
coefficient: department stores, apparel retail and luxury goods. You'd think
it would be safe to assume that the retail sector benefits when consumers have
been given relief from high gas prices. This is certainly the case now: Walmart,
a bellwether for general market sentiment, is hitting new highs, and Tiffany & Co.,
which we own in our Gold
and Precious Metals Fund (USERX), is also thriving. But in the past, low
oil and gas prices have been reflections of a weak domestic economy. The average
price per barrel of crude in 2009 was $62, a sharp decrease of nearly 40 percent
from the average in 2008. Today, gas is inexpensive not because the economy
is weak but because frackers are simply too good at what they do. They're victims
of their own success. What has hurt them has helped American consumers build
more disposable cash flows, which can now be spent on fast food, retail, home
improvement and other goods and services.

OPEC Unlikely to Make Production Cuts, Consensus Says

Members of the Organization of the Petroleum Exporting Countries (OPEC) will
be meeting on the 27th, and no doubt the discussion will center on whether
to curb production to help oil prices recover. However, a new poll shows that
commodity and energy investors do not believe such a cut will occur. According
to BMO Capital Markets, 87 percent of those polled believed that no cut would
be agreed on. Even those who said a cut would happen believed it would be no
more than a million barrels a day, an insignificant amount.

Of course, this is merely a poll, but we might be looking at cheap oil and
gas for an indefinite amount of time, with a bottom possibly reached sometime
between now and February.

In the meantime, American producers will continue to pour out record levels
of oil, and President Vladimir Putin's antics in Ukraine will continue to stir
up geopolitical tension. Saudi Arabia appears to be more aligned with Europe
and the U.S. against Russia, Syria and Iran.

All of this short-term activity might be bad for the fracking industry, but
the big winners are consumers and investors. We're in a steady, modest expansion
of our economy and this is good for investing in domestic stocks.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors,
Inc., which manages a diversified family of mutual funds and hedge funds specializing
in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and
certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing
global natural resources fund in 2010. In 2009, the World Precious Minerals
Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four
years for that achievement. In addition, both funds received 2007 and 2008
Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a
leading publication for the global resources industry, and he is co-author
of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve
global conflict, and the William J. Clinton Foundation on sustainable development
in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator
on financial television. He has been profiled by Fortune, Barron's, The Financial
Times and other publications.

Please consider carefully a fund's investment objectives, risks, charges and
expenses. For this and other important information, obtain a fund prospectus
by visiting www.usfunds.com or by calling
1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed
by U.S. Global Brokerage, Inc.